The Gazette 1983

GAZETTE

N O V E M B E R

1983

shares" or "relevant employee shares". This rule is of considerably more significance to a public company as a private company may exclude the requirement by its Memorandum or Articles. Broadly speaking "equity securities" means all shares, including rights to subscribe for or convert into shares, except shares giving a right to participate in distributions limited to a specified amount (usually preference shares), bonus shares, employees' shares and subscribers' shares. Such "equity securities" must first be offered to all holders of "relevant shares" or "relevant employee shares" (as defined in sub-section (13)) that is all shares other than shares carrying a fixed right to participate in distributions (and for this purpose employees' shares are included). It should be stressed that these provisions do not apply if the equity securities are to be wholly or partly paid up otherwise than in cash. "Cash" for the purposes of the Act, bears a special meaning set out in Section 2(3) of the Act and referred to in more detail in connection with Section 29 (see below). The offer need not be made to persons who only hold conversion or subscription rights but must be made to holders of all classes of shares, provided that the shares otherwise qualify, so that a person may be entitled to receive an offer of shares of a different class from his existing shareholding. The Act lays down the detailed procedure for making the offer and the rules for acceptance. Section 23 contains provisions excluding or limiting the application of the Section in certain cases. The drafting of these provisions is bordering on Delphic but, in summary: (a) if any company has provisions in its memorandum or Articles which requires it to make an offer as described in Section 23(1) to each person who holds relevant shares or relevant employee* shares of any class if it proposed to allot equity securities existing of relevant shares of that class, then the company may allot such securities in accordance with such provisions and sub-section (1) shall not apply; (b) such securities may be allotted either to the original allottee or to anyone in whose favour he has renounced his rights; (c) sub-section (7) and (8) provide that any offer, whether made pursuant to sub-section (1) or to provisions in the Company's Memorandum or Articles, must be made by serving the same in accordance with Regulations 133, 134 and 135 of Table A and must state a period of not less than 21 days during which the offer may be accepted; and the offer shall not be withdrawn before the end of that period; (d) sub-section (1) does not apply if the securities arc allotted under an employee's share scheme (even if the person entitled under that scheme has renounced or assigned his rights to the securities). It is very important to note that a private (but not pub l ic l imi t e d) c omp a ny may e x c l u d e, in its Memorandum or Articles, the application of sub-sections (1), (7) and (8) of Section 23, and a requirement or authority contained in the Memorandum or Articles of a private company shall, if inconsistent with any of these sub-sections, have effect as excluding them. Sub-section (11) provides that the company (and every

officer thereof who knowingly authorised or permitted a contravention) shall be jointly and severally liable to compensate any person to whom an offer should have been made under the Section, for any loss damage, costs or expenses incurred (subject to a two year limitation period commencing from the date of delivery to the Registrar of a return of allotments (or where equity securities other than shares are granted, from the date of the grant). In addition to the power for a private company to exclude the pre-emption requirement in its Memorandum or Articles the directors of either a private or a public company may under Section 24 be given a power, where they are generally authorised under Section 20, to allot equity securities without regard to the pre-emption requirements, or with such modification as they may determine. The power may be conferred by the Articles or by a special resolution but lasts only as long as the authority to allot and should therefore be renewed by special resolution when the authority expires. Such power may also be given to the directors, in relation to a particualr allotment, by a special resolution but in this case the directors must circulate with the notice of the meeting a written statement setting out their reasons for making the recommendations and giving certain other particulars of the proposals. It should be noted that the Stock Exchange will usually only permit such authorisation, in the case of a quoted company, to be given for maximum period of one year without being renewed and will only, as a rule, permit such power to be given in respect o f not more than five per cent, of equity capital. (See Clause 13 of Stock Exchange Listing Agreement). The directors may allot equity securities pursuant to an offer or agreement made before the power to allot lapses provided that the power enabled the company to make an offer or agreement in those circumstances. This point should be borne in mind in drafting the relevant Article or special resolution. Payment for Share Capital The new provisions relating to payment for share capital contained in Sections 26 to 37 are designed to ensure that a company receives satisfactory consideration for the shares that it issues, particularly when the consideration is otherwise than in cash. Subject to certain transitional provisions it is now illegal for any company, whether private or public, to issue shares at a discount. The other provision which relates to private companies (after the transitional period) is that any shares allotted and any premium payable on them may only be paid up in money or "money's worth" which includes goodwill and know-how. Most of the other provisions discussed under this heading, which only apply to public limited companies, do not apply until the company passes the requisite resolution for registration or re-registration as a limited public company. For a public limited company "money's worth" does not include an undertaking to do work or perform services but these provisions do not prevent any company from allotting bonus shares or from paying up amounts unpaid on its shares with sums that are "available for the purpose", the meaning of which will be discussed more fully in the final article in this series when dealing with restrictions on distribution. 289